In recent months, we have seen some of the largest bank failures in American & European history. The mainstream media narrative (e.g., New York Times) has largely been that the “crypto contagion” is introducing systemic risk into the banking system, eliciting a strong regulatory reaction that ‘it must be stopped.’

This is incorrect. Deposit concentration, poor management (i.e., poorly executed asset-liability matching strategies), and a lack of regulation mandating cash reserve minimums killed the banks. Not crypto.

Here’s the TLDR on the banks that failed, and the unfiltered reason why:

• Silvergate Bank - Major customer FTX collapses, causing 10-K filing delay, causing corporate customer FUD, causing bank stock crash, causing corporate bank run, causing collapse. Bank was exposed to interest risk and concentration risk. All depositors were made whole after liquidation.

• Silicon Valley Bank - Corrupt management & poor asset-liability mismatch strategy makes bank insolvent, causing depositor FUD, causing bank run, causing collapse. Bank was exposed to liquidity risk and concentration risk. 90%+ of bank’s accounts held over FDIC insured amount of $250k. All depositors were made whole by the FDIC, Federal Reserve and Treasury Department.

• Signature Bank - SVB contagion, exposure to liquidity risk (only 5% of assets were in cash) & bank’s (minority) exposure to crypto customers caused Signature Bank depositor and investor FUD, causing stocks to plummet, causing corporate customer bank run, causing regulators to preemptively shut down the bank. 90%+ of bank’s accounts held over the FDIC insured amount of $250k. All depositors were made whole by the FDIC, Federal Reserve and Treasury Department.

• First Republic Bank - SVB contagion caused FRB depositor and investor FUD, causing FRB stocks to plummet, causing a $70B wealthy depositor bank run. 68% of bank’s accounts held over the FDIC insured amount of $250k.

• Credit Suisse [Not American, But a Bonus!] - Extremely poor, rotating management, scandals, and two investment fund collapses caused significant collapses, causing sharp stock decline, causing bank failure rumors, causing customer FUD, causing a $119B bank run, which eventually led to a UBS purchase for just $3B (their primary competitor).

Do you see a pattern here? No? Well let’s outline the high-level patterns that led to the collapse of the aforementioned institutions:

1. Uninsured Account Risk. All the American banks had a vast majority of their accounts holding over $250k, which is the FDIC insurable maximum. By concentrating either (1) on niche markets (like technology sector businesses or private equity loans) or corporate accounts more generally, these financial institutions knowingly bore the risk of deposit concentration while also playing the asset-liability mismatch game during a time where supposedly safe assets, such as treasury bonds, continue to lose value as newer bonds offer a higher interest rate.

2. Investor Speculation & an Over-Reliance on Trust-Based Banking. The only thing that has ever protected a run on the banks has been the institutional trust of depositors. Nothing else. However, social media has caused a massive paradigm change in how institutional trust and reputation is maintained. Up until the 2010’s, news didn’t move at the speed of light. Now that it does, the acceleration and deceleration of public opinion does to. Depositors can be confident in their financial institution on Monday, and on Friday collectively withdraw tens of billions of dollars overnight. Social media, paired with market uncertainty can destroy financial institutions faster than ever before. Such a paradigm shift is a clear indication that trust based systems are only going to get weaker as time goes by (so maybe we shouldn’t rely on them anymore).

3. Poor Money Management. Knowingly taking on deposit concentration risk, interest risk, and liquidity risk is poor money management - particularly during one of the most economic turbulent times in recent history since the Great Recession. I do not care of a careered financial experts try to tell me that “this is the way things have been done, and how banks make money!” Times are changing. If social media can cause an instantaneous bank run at any moment, then capital management strategies should become a lot more conservative and hold higher cash reserves. It is no longer good enough to say that government bonds are a safe investment when the federal interest rate increases every month. They are a good investment as you are sure that your depositors aren’t going anywhere. Otherwise, you need to keep cash on hand. As a reminder, poor money management is reflective of taking on too much

   1. exposure to liquidity risk;

   2. exposure to interest risk worsened/caused by hiked Fed rates, and;

   3. exposure to concentration risk.

4. Fed Rate Hikes. Federal interest rate hikes facilitated by the Federal Reserve since the beginning of the COVID-19 pandemic have continually devalued treasury bonds that many banks have used to generate revenues on depositor funds. Treasury bonds are SUPPOSED to be safe - but they are not safe when you use fleeing capital to invest in devalued, longer-term bonds. Since Q2 FY22, federal interest rates have increased 1,900% from 0.25% to 5% to tame inflation caused by printing $5 trillion in stimulus payments.

It’s always fed hikes, speculation, & mis-management.

Humans are notoriously untrustworthy managing money. In contrast to popular belief, institutional failure, investor speculation, & poor government reaction have long been the ingredients to the poop-soup that is macro-economic recession and depression. We often refer to recessions as a natural part of the business cycle, mainly because of how predictable human behavior (greed & emotional investing) is.

Don’t believe me? You don’t need to. I have the receipts.

12 of America’s 19 recessions (and one depression) can be attributed toward (1) institutional failure, (2) investor speculation, and/or (3) poor government reaction (specifically, excessive federal interest rate increases).

• 1797: The Panic of 1797 resulted from land speculation. The First Bank of the United States and U.S. Treasury Secretary Alexander Hamilton expanded the money supply, leading to the boom and bust.

• 1857: Embezzlement at the Ohio Life Insurance and Trust Company's New York branch triggered a panic. When a ship carrying gold en route to New York sank, investors lost faith in paper money. Businesses couldn't make their payrolls, and commerce ground to a halt.

• 1873: The construction of the national railway system created speculation that led to the collapse of the largest U.S. bank. The recession lasted until 1879.

• 1893: The Reading Railroad failed, leading to other railway failures and a stock market crash. Banks suspended cash payments, leading to the hoarding of cash and bank failures.

• 1907: The "Panic of 1907" lasted from May 1907 to June 1908. It was caused by speculators' losses that spread to trust companies. These firms acted like banks but had lower reserves. Congress created the Federal Reserve System to prevent future collapses.

• 1929–38: The biggest economic crisis in U.S. history was two closely related recessions. Several factors combined to create the Great Depression. The Fed raised interest rates in the spring of 1928 and continued despite the recession (like what they are doing now). The 1929 stock market crash destroyed businesses and life savings. A 10-year drought in the Midwest created the Dust Bowl that devastated farmers. The New Deal ended the first recession, boosting growth by 10.8%. The second recession ended when the drought did, and the government increased spending for World War II.

• 1949: This 11-month recession began in November 1948 and lasted until October 1949, when unemployment peaked at 7.9%. It was caused by the Fed raising interest rates too quickly.

• 1953: In this recession, which took place from August 1957 to April 1958,19 GDP fell 4.1% in Q4 1957, then contracted to a low of 10.0% in Q1 1958. Unemployment didn't reach its peak of 7.5% until July 1958. The Fed's contractionary monetary policy caused this economic slowdown.

• 1980-82: The economy suffered a double whammy of two recessions in this period. There was one during the first six months of 1980. The second lasted 16 months, from July 1981 to November 1982.19 The Fed caused this recession by raising interest rates to combat inflation. That reduced business spending. The Iranian oil embargo aggravated economic conditions by reducing U.S. oil supplies, which drove prices up.

• 2008 - Great Recession: The Great Recession lasted from December 2007 to June 2009, the longest contraction since the Great Depression. The subprime mortgage crisis triggered a global bank credit crisis in 2007. By 2008, the damage had spread to the general economy through the widespread use of derivatives.

Provided that investor speculation, federal interest rate increases, and institutional management risk are part of the DNA that is the “American recession,” it should come to no surprise that these elements were at play within the Silicon Valley Bank, Signature Bank, and First Republic Bank collapses (and Credit Suisse, but again, not American).

Only Silvergate was a causality of over-exposure to the cryptocurrency market - and it was not the technology that caused the problem - it was centralized fraud committed by FTX paired with over-investment by Silvergate Bank’s management.

So the question is, why expect a financial system that can (and has) collapse at the whim of investor speculation and institutional trust, when we can now build hyper-transparent, trustless financial systems using blockchain technology?

Why Bitcoin introduced trustless banking.

This is why Bitcoin was created post-2008 crisis; to instill a trustless financial system that wasn’t reliant on innate, institutional trust that has has been so present in the financial failings of the traditional market. This is not to disregard the massive advancements made by the traditional financial system. But, as all things, we must evolve to bigger and better things. Unless you want to go back to riding horses on cobble-stone roads and eating talc.

As a reminder to all: Crypto is not indicative of just cryptocurrency.

The catch-all term “Crypto” was used to embody the whole of blockchain technology long before “Web3” investors came out to play. The term has been sullied by the actions of fraudsters (SBF), murderers (RWU), and scammers alike. Interestingly, it has not been affiliated with the technology’s successes, which are far too many to count at this point (but I have listed a few):

1. $63.8M in donations to the Ukrainian government to fend off Russian invasion

2. $50M in funding toward open source, public goods

3. Providing crop insurance to farmers that never had access before

4. Deploying 100% transparent humanitarian aid to those in need (1, 2, 3)

5. Protecting factory worker health and safety

Regulators only react. They don’t innovate.

As mainstream media seems to have its target set on the generalized back of “Crypto,” regulators are swiftly responding to the continued banking contagion. In fact, midsize banks are reportedly lobbying federal officials to guarantee all bank deposits over the next two years to stop the outflows, but doing so would eliminate asset-liability management responsibility and accountability of such institutions, as they no longer would be beholden to customer confidence (the only thing that prevents bank runs from happening).

Former FDIC Chairwoman Sheila Bair, said it best: “Unlimited insurance would be very expensive to do. It would be assessed on the banking system, backstopped by taxpayers, and would primarily help very, very wealthy people.”

Unfortunately, it’s not looking good for the future of blockchain technology in the U.S., and, more and more, the future potential of Crypto is likely to be sooner realized elsewhere, where regulation by enforcement is a relic of the past.